The Financial Crisis, the Great Recession and the Developing World

This article analyses the implications of the global economic crisis for developing countries, situated in the wider context of the world economy, and suggests that the crisis also provides an opportunity for rethinking policies at the national level and contemplating collective action at the international level, so that outcomes are more conducive to development. The world economy witnessed a collapse in international trade and a sharp contraction in output and employment. But the developing world coped better than industrialised countries and transition economies as the impact was less adverse and the recovery was somewhat quicker. China, India and Brazil stand out as exceptions. Initial conditions, policy responses and domestic demand shaped their resilience and recovery. These emerging economies or parts of the developing world cannot drive recovery or turn into engines of growth for the world, but their experience suggests important policy lessons. The prospects of recovery in the world economy remain uncertain. The supposed trade-off between financial stability and economic growth is a false dilemma. Recovery is sustainable only if it is based on a rebalancing of the world economy that extends beyond current account deficits and surpluses to income–expenditure gaps and income distribution within countries. An increase in the share of wages in GDP would be conducive to growth everywhere. This is possible if wages keep pace with productivity growth and full employment is the primary objective. In the global context, international collective action is an imperative for crisis management and crisis prevention.

Macroeconomic objectives should be redefined so that the emphasis is on fostering employment creation and supporting economic growth rather than on price stability alone.
There is a need to integrate short-term fiscal and monetary policies, which are powerful and versatile instruments, with long-term development objectives.
It is necessary to exercise restraint in the deregulation of domestic financial sectors, and hasten slowly with capital account liberalisation, or retain the option of capital controls.
Rebalancing of the world economy requires some redistribution of incomes within countries.
Increased employment can provide a sustainable solution to the crisis and in the process deliver growth with equity.
Institutional mechanisms should be developed, with representation and participation, in order to implement international collective action.